Intro to Cryptocurrencies and Blockchain Technology (Part 3 of 4)

Cryptocurrency as a Digital Asset

Bitcoin vs. Other Assets

“Bitcoin, that nebulous digital currency that trades in cyberspace and is “mined” by code-cracking computers, emerged as a better bet this year than every other foreign-exchange trade, stock index, and commodity contract. The electronic coin that trades and is regulated like oil and gold surged 79 percent since the start of 2016 to $778, the highest level since early 2014, data compiled by Bloomberg show. That’s four times the gains posted by Russia’s ruble and Brazil’s real, the world’s top two hard currencies.”

Value by Design

The blockchain protocol dictates that the supply of bitcoin is limited to 21,000,000 bitcoins. In addition to this limitation of supply, the reward that is given to the miners who verify the transactions of the network is designed to decrease by one-half roughly every four years. As a result, the supply of newly created coins will dwindle over time until all 21,000,000 have been mined.

Once new bitcoins are no longer being awarded to miners, the miners will be compensated by transaction fees instead of newly created bitcoins. While the supply grows less and the demand is growing larger, the value of bitcoin can only increase. Satoshi Nakamoto engineered this feature deliberately, and as we have seen, his purpose of continued valuation has worked flawlessly.

Below is a graph which shows the chronological progression of the monetary base and inflation rate of bitcoin.

While bitcoin’s price has historically seen a lot of volatile fluctuations, the overall trend is still going up. In a Forbes article written by Kashmir Hill, the price action of bitcoin was compared to the performance of other major assets during the same period.

Historical Price Action

Over the past eight years, the effects of high demand, capital controls (the shift toward a “cashless society”), and the increasing bitcoin scarcity (reduction in mining rewards) have driven the price of one bitcoin up by over 17 million percent.